Martin Stuart Feldstein was born in November 25, 1939. He is currently
the George F. Baker Professor of Economics at Harvard University, and the president
emeritus of the National Bureau of Economic Research (NBER).

He served as President and Chief Executive Officer of the NBER from 1978 through
2008. From 1982 to 1984, Feldstein served as chairman of the Council of Economic
Advisers and as chief economic advisor to President Ronald Reagan (where his deficit
hawk views clashed with Reagan administration economic policies). He has also been
a member of the Washington-based financial advisory body the Group of Thirty since
2003.

Feldstein was born in New York City and graduated from South Side High School
in Rockville Centre, New York. He completed his undergraduate education at Harvard
University (B.A., Summa Cum Laude, 1961), where he was affiliated with Adams House,
and then attended University of Oxford (B.Litt., 1963; D.Phil., 1967). He was also
a Fellow of Nuffield College, Oxford from 1964 to 1967.

In 1977, he received the John Bates Clark Medal of the American Economic Association,
a prize awarded every two years to the economist under the age of 40 who is judged
to have made the greatest contribution to economic science. He is among the 10 most
influential economists in the world according to IDEAS/RePEc.[1] He is the author
of more than 300 research articles in economics and is known primarily for his work
on macroeconomics and public finance. He has pioneered much of the research on the
working mechanism and sustainability of public pension systems. Feldstein is an
avid advocate of Social Security reform and was a main driving force behind former
President George W. Bush's initiative of partial privatization of the Social Security
system. Aside from his contributions to the field of public sector economics, he
has also authored other important macroeconomics papers. One of his more well-known
papers in this field was his investigation with Charles Horioka of investment behavior
in various countries. He and Horioka found that in the long run, capital tends to
stay in its home country – that is to say, a nation's savings is used to fund its
investment opportunities. This has since been known as the "Feldstein–Horioka puzzle".

In 2005, Feldstein was widely considered a leading candidate to succeed chairman
Alan Greenspan as Chairman of the Federal Reserve Board. This was in part due to
his prominence in the Reagan administration and his position as an economic advisor
for the Bush presidential campaign. The New York Times wrote an editorial advocating
that Bush choose either Feldstein or Ben Bernanke due to their credentials.

Ultimately, the position went to Bernanke, possibly because Feldstein was a board
member of AIG, which announced the same year that it would restate five years of
past financial reports by $2.7 billion. Subsequently, as a result of risky bets
made by its Financial Products Division, AIG suffered a massive financial collapse
that played a central role in the worldwide economic crisis of 2007–08 and the ensuing
global recession. The firm was rescued only by multiple capital infusions by the
U.S. Federal Reserve Bank, which extended a $182.5 billion line of credit. Although
Feldstein was not explicitly linked to the accounting practices in question, he
had served as a Director of AIG since 1988.

On September 10, 2007, Feldstein announced that he would be stepping down as
president of NBER effective June 2008.[5]

Feldstein served as a member of the President's Foreign Intelligence Advisory
Board from 2007 to 2009.[6]. Feldstein said in March 2008 he believed the United
States was in a recession and it could be a severe one.[7]

As a member of the board of AIG Financial Products, Feldstein was one of those
who had oversight of the division of the international insurer that contributed
to the company's crisis in September, 2008. In May 2009, Feldstein announced he
would step down as a director of AIG.[8] He serves as a board member for Eli Lilly
and Company.[9] He previously served on the boards of several other public companies
including JPMorgan and TRW.

On February 6, 2009, Feldstein was announced as one of U.S. President Obama's
advisors on the President's Economic Recovery Advisory Board.[10]

He currently serves on the board of directors of the Council on Foreign Relations,
the Trilateral Commission, the Group of 30 and the National Committee on United
States-China Relations.[6] Feldstein was invited to participate in the Bilderberg
Group annual conferences in 2008 and 2010.[11][12] He is also a member of the JP
Morgan Chase International Council.

Feldstein has been seen as a perennial contender for the Nobel Prize in Economic
Sciences...

At Harvard campus, Feldstein taught the introductory economics class "Social
Analysis 10: Principles of Economics" for twenty years, being succeeded by N. Gregory
Mankiw. The class was routinely the largest class at Harvard, and remains one of
the largest, having been passed in 2007 by Michael Sandel's "Justice" (Moral Reasoning
22). He currently teaches courses in American economic policy and public sector
economics at Harvard College.

Feldstein may have made one of his greatest impacts through the concentration
of his students in top echelons of government and academia. These include:

Larry Summers, former Harvard president and U.S. Treasury secretary;

David Ellwood, dean of Harvard's Kennedy School of Government;

James Poterba, MIT professor and member of Bush's tax reform advisory
panel.

Lawrence Lindsey, formerly Bush's top economic adviser, wrote his doctoral
thesis under Feldstein, as did Harvey S. Rosen, the previous chairman of the
president's Council of Economic Advisers,

José Piñera, Chile's Secretary of Labor and Social Security during its pension
privatization in 1980–1981,

Jeffrey Sachs, Director of the Earth Institute at Columbia University,

Glenn Hubbard, Bush's first chairman of the council and now dean of
the Columbia Business School.[13

Martin Feldstein
provoked Brad DeLong's ire with a Wall Street Journal
op-ed that tries to show how Mitt Romney's tax cut plan
could lead to no increase in the deficit or the need to
raise taxes on middle- and lower-income Americans, and takes
issue with five points, including one where Feldstein makes
a mathematical error by counting savings from removing tax
deductions as if the current tax rates were in place, rather
than Romney's proposed rates. DeLong rushes through the
first four objections (which he gives Feldstein a pass on
since the fifth is the most easiest and makes Feldstein's
point moot, since $152 billion > $168 billion is a false
statement). Here are a few of the four other items

First,
Feldstein argues that Romney's tax cuts cost $168 billion,
once you add in the 'dynamic scoring', which is wonk-speak
for magical supply side effects where tax cuts benefit the
economy so as to raise GDP enough that the taxes on the
additional GDP offsets some of the cost of the tax cuts.
The CBPP has a
good summary of the arguments against using dynamic scoring
in budget estimates which can best be summarized as the
effects are highly uncertain and are likely to be small.
The love of conservatives for dynamic scoring is that, when
fed in high estimates of the feedback from tax cuts to
growth that are not well supported in empirical study (they
are high than reality), they show that tax cuts have a more
stimulative impact on economic growth than they actually do,
and lead to the conclusion that tax cuts are much less
costly than they actually are.

Second, Romney has not provided any specific deductions
that he would propose eliminating and the Tax Policy Center
report (pdf),
which
he criticized unfairly as being 'biased', makes an
overwhelmingly friendly assumption that deductions on
high-income could politically be eliminated (a very rosy
assumption in favor of Romney's plan). By assuming this
rosy political outcome, it effectively lowers the impact on
the deficit by assuming more deductions will be removed for
high-income people than can be credibly assumed.

Thirdly, Feldstein's plan 'moves the goalposts' as DeLong
points out by including in the amount of deductions those
claimed by everyone with more than $100,000 (a much larger
group than Obama's focus for not extending the Bush tax cuts
for only those people with incomes of $250,000). This leads
his estimate of total deductions at $636 billion to be much
larger than any plausible scope for deductions to be
eliminated since it includes the mortgage interest deduction
for people earning between $100,000 and $250,000.

While one can argue the merits of the deduction of
mortgage interest for this segment of earners (and for all
earners), there is no way in hell that any politician would
vote for a bill to do this any time in the near future
(remember, it would have to pass the House whose members
have to go try and get re-elected every 2 years). The
conservative Tax Foundation has
data showing that of all tax returns filed, 6.8% of
those are filed by people with incomes between $100,000 and
$200,000, and include an average of almost $9,000 in
deductions from the mortgage interest deduction. With 150
million returns filed annually, the back-of-the-envelope
amount of deductions that are being added into Feldstein's
number by moving the goal post just from the mortgage
interest deduction is approximately $91 billion, or about
one-seventh of the value of the deductions he thinks (with
questionably support) could be eliminated.

The final straw for Brad DeLong was when Feldstein
estimated the budgetary impact from eliminating $636 billion
in deductions, where he used an average rate of 30%, which
DeLong explains:

Taxpayers making more than $100K/year in AGI had marginal
tax rates of 25%-35% in 2009–an average tax rate,
Feldstein assumes, of 30%.

After Romney's 1/5 reduction in tax rates they will have tax
rates of 20%-28%–an average tax rate of 24%.

Multiplying not the wrong 30% but the true correct
24% marginal tax rate by the $636 billion in itemized
deductions gets us not $191B but $152B.

$152B < $186B

DeLong makes a great point, but even giving a pass on the
average tax rate being 30% (rather than what it would be,
closer to 24%), and instead focusing on just moving the
goalposts from $200k down to $100k (for the income levels
where the deductions start to be eliminated) and just
focusing on the impact of the mortgage interest deduction,
we have Feldstein's questionable 'savings' from eliminating
deductions of $191 billion reduced by $27 billion ($91
billion in deductions * 30%), which puts Feldstein's math
wrong again because he is now saying:

$164B < $186B

And as DeLong pointed out, there are so many dodgy
assumptions that get Feldstein to his original numbers that
it is more and more ridiculous for anyone to defend the idea
that Romney's budget can either a) not increase the deficit,
or b) not lead to increased taxes on people earning under
$250k / $200k / $100k (pick your favorite).

I am still away from my office and have had a full-day of meetings today
– so very little time to write. But earlier today I read another one of those
articles from a senior US academic economist about the need to cut aged pensions
in the US because the government is running out of money. Martin Feldstein –
a Harvard professor – has been found to have engaged in highly questionable
conduct (to say the least) by investigations into the causes of the financial
crisis. Feldstein must surely know that the government cannot run out of money.
Which brings into question his motivation for providing misleading interventions
into the policy debate. He has demonstrated over a long period his willingness
to hide behind the "authority" of economic theory in order to pursue an ideological
obsession with privatisation and deregulation. When writing what seemed to be
academic papers or opinion pieces supporting financial deregulation, for example,
he didn't at the same time declare that he was personally gaining from such
a policy push. His subsequent track record as a board member of companies, some
of which collapsed in the crisis (AIG) or triggered the collapse has been appalling.
Feldstein is not the sort of person anyone should take advice from much less
pay for it.

I read the
statement made by the President of the US yesterday where he said:

The cause of securing our country is not complete. But tonight, we are
once again reminded that America can do whatever we set our mind to. That
is the story of our history, whether it's the pursuit of prosperity for
our people, or the struggle for equality for all our citizens; our commitment
to stand up for our values abroad, and our sacrifices to make the world
a safer place.

I thought – yes America can do whatever it sets it mind to – except create
enough jobs to ensure that families have secure incomes and children have a
secure future. That relatively simple task seems to escape them. But then I
thought about the wording more carefully and "whatever we set our mind to" became
the focus.

There are millions of Americans unemployed including nearly one-quarter of
16-19 years old who desire to work – and the American government clearly "hasn't
set its mind to" providing them with opportunities to work.

The world is certainly not a safer place for the unemployed.

It comes as no surprise though given the type of economist that provides
the US government with advice – Summers, Rubin, etc – a long line of deregulating,
in-it-for-themselves advisers. On February 9, 2009 Harvard professor joined
a long line of such characters accepting official appointments. He was appointed
to the US President's Economic Recovery Advisory Board which was formed top
advise him on appropriate remedies to the crisis.

Feldstein would have been one of the last people I would have appointed to
such a role given his background. You only have to read this Wall Street Journal
article (May 2, 2011) –
Private Accounts Can Save Social Security – where Feldstein advocates cutting
public pensions for the aged because the US government cannot afford to pay
such entitlements. He promotes the privatisation of the pension scheme.

By way of background, Feldstein was one of the economists named in the recent
investigative movie –
Inside Job
– which the Director Charles Ferguson said was about "the systemic corruption
of the United States by the financial services industry and the consequences
of that systemic corruption."

Feldstein ran the Boston-based private organisation National Bureau of Economic
Research for nearly 3 decades. The NBER provides an avenue for the mainstream
economists to build national prestige and a range of influential appointments.
If you examine the research and publication agenda of the NBER you will appreciate
that under Feldstein's direction various mainstream economic policies were promoted
– including his Wall Street Journal topic – privatising the US pension and the
health systems.

They also pushed economic analysis claiming to justify the optimality of
deregulating the financial sector.

Martin Feldstein, a Harvard professor, a major architect of deregulation
in the Reagan administration, president for 30 years of the National Bureau
of Economic Research, and for 20 years on the boards of directors of both
AIG, which paid him more than $6-million, and AIG Financial Products, whose
derivatives deals destroyed the company. Feldstein has written several hundred
papers, on many subjects; none of them address the dangers of unregulated
financial derivatives or financial-industry compensation.

For those who haven't seen the movie, here is a transcript of the segments
with Feldstein. Arrogance understates his contribution to the movie.

Ferguson: Over the last decade, the financial services industry has made
about 5 billion dollars' worth of political contributions in the United
States. Um; that's kind of a lot of money.That doesn't bother you?

Feldstein: No.

Narrator: Martin Feldstein is a professor at Harvard, and one of the
world's most prominent economists. As President Reagan's chief economic
advisor, he was a major architect of deregulation. And from 1988 until 2009,
he was on the board of directors of both AIG and AIG Financial Products,
which paid him millions of dollars.

Ferguson: You have any regrets about having been on AIG's board?

Feldstein: I have no comments. No, I have no regrets about being on AIG's
board.

Ferguson: None.

Feldstein: That I can s-, absolutely none. Absolutely none.

Ferguson: Okay. Um – you have any regrets about, uh, AIG's decisions?

Feldstein: I cannot say anything more about AIG

Later in the movie Ferguson re-engages with Feldstein:

Ferguson: You've written a very large number of articles, about a very
wide array of subjects. You never saw fit to investigate the risks of unregulated
credit default swaps?

Feldstein: I never did.

Ferguson: Same question with regard to executive compensation; uh, the
regulation of corporate governance; the effect of political contributions
-

Feldstein: What, uh, what, uh, w-, I don't know that I would have anything
to add to those discussions.

Feldstein is not the sort of person anyone should take advice from much less
pay for it.

In his Wall Street Journal article he exercised all the mainstream myths
about pensions and claimed that "(e)ven Mr. Obama accepts the inevitability
of lower future Social Security benefits". Which doesn't sit well with his speech
yesterday which claimed that America was about "the pursuit of prosperity for
our people".

Feldstein claims that the American pension system is collapsing because the
dependency ratio is rising or in his words:

There are now three employees paying Social Security taxes to finance
the benefit of each retiree. That number will fall over the next three decades
to only two employees per retiree. This would require either a 50% rise
in the Social Security tax rate to maintain the existing benefit rules,
or a one-third cut in projected benefits to maintain the existing tax rate.

The correct statement is that the employees produce real goods and services
which define the material standard of living for those who do not produce real
goods and services (but may have in the past). The taxpayers only look as if
they finance social security in the US because of the accounting arrangements
that are in place to account for the tax receipts.

The reality is that the public pension scheme does not require any funding
at all – as a branch of government it can always pay the pensions as long as
they are denominated in US dollars.

So Feldstein is lying by claiming that tax rates have to rise or benefits
fall. Neither is required when you understand the intrinsic financial issues
involved.

So his claim that "(t)hat's why every serious budget analysis calls for reducing
the growth of Social Security benefits" is spurious and just rehearses his regular
calls to private social security and deregulate markets in general. He has no
credibility at all on this position.

A serious budget analysis would suggest that health care costs are rising
because the American government is too scared to introduce a competitive insurance
scheme and the private insurance industry has excessive market power. In making
that statement I am not acknowledging that there is a budget blowout issue.
It is merely a reflection that Americans spend more on health per capita than
anyone and are among the least healthy. Something is wrong and it is not an
impending budget collapse.

All the tinkering with the US pension scheme such as that proposed by (as
Feldstein says) "(t)he bipartisan Simpson-Bowles Fiscal Commission appointed
by President Barack Obama" – like "slowing the rise in Social Security benefits
by increasing the age at which full benefits would be payable, and by changing
the benefit formula so that the ratio of benefits to previous wages gradually
declines for most future retirees" – completely misrepresent the true nature
of the problem facing a nation with a rising dependency ratio.

Feldstein chooses to perpetuate that ignorance presumably because he senses
some personal gain in do so – given his track record that was exposed in the
Inside Job.

What is the problem with a rising dependency ratio?

First of all, what is a dependency ratio?

The standard dependency ratio is normally defined as 100*(population 0-15
years) + (population over 65 years) all divided by the (population between 15-64
years). Historically, people retired after 64 years and so this was considered
reasonable. The working age population (15-64 year olds) then were seen to be
supporting the young and the old.

The aged dependency ratio is calculated as:

100*Number of persons over 65 years of age divided by the number of persons
of working age (15-65 years).

The child dependency ratio is calculated as:

100*Number of persons under 15 years of age divided by the number of persons
of working age (15-65 years).

The total dependency ratio is the sum of the two. You can clearly manipulate
the "retirement age" and add workers older than 65 into the denominator and
subtract them from the numerator.

… a measure of the number of persons in the total population (including
the Armed Forces overseas and children) who are not in the labor
force, per hundred of those who are.

The following graph (taken from
BLS data) projects the economic dependency ratio out to 2018. No particular
issues are noted.

In this paper – Age Dependency
Ratios and Social Security Solvency – which was prepared by the US Congressional
Research Service at The Library of Congress is interesting because it considers
dependency ratio projections out to 2018. It doesn't get the economics correct
(presuming there might be a social security funding problem should thedependency
ratio worsen) but it seems to get the demographics correct. It concludes:

If one considers the 130 year period from 1950-2080, the greatest demographic
"burden" — when the number of dependents (children plus the elderly) most
exceeds persons in the working-age population — is already in the past

Anyway my point isn't to argue whether the dependency ratio as traditionally
defined is rising or falling. I do not consider that to be an issue of social
security solvency. However, I do see it as an issue in terms of the provision
of real goods and services.

Interestingly, the BLS Monthly Review noted above also highlights the dramatic
decline in participation rates particularly among males in the US.

The standard measures of dependency are partial at best. If we want to actually
understand the changes in active workers relative to inactive persons (measured
by not producing national income) over time then the raw computations are inadequate.

To get a more detailed view of "dependency" we consider the so-called
effective dependency ratio which is the ratio of economically active workers
to inactive persons, where activity is defined in relation to paid work. So
like all measures that count people in terms of so-called gainful employment
they ignore major productive activity like housework and child-rearing. The
latter omission understates the female contribution to economic growth.

Given those biases, the effective dependency ratio recognises that not everyone
of working age (15-64 or whatever) are actually producing. There are many people
in this age group who are also "dependent". For example, full-time students,
house parents, sick or disabled, the hidden unemployed, and early retirees fit
this description.

However, usually the unemployed and undereemployed are not included in this
category because the statistician counts them as being economically active.
But clearly in terms of defining the problem as being one of ensuring their
is enough real output available for each of the future generations to enjoy
they should be included. Not only for the dramatic loss of current output that
mass unemployment creates but also the dynamic intergenerational impacts that
unemployment delivers.

For example, teenagers who endure entrenched unemployment are typically not
able to acquire the necessary skills which maximise their potential productivity
in adult life. So the "dependency" is magnified across time even if they subsequently
gain work.

If we then consider the way the neo-liberal era has allowed mass unemployment
to persist and rising underemployment to occur you get a different picture of
the dependency ratios. The adjusted ratio for the US at present and into the
future is much worse than the official estimates would suggest.

I do not have time to day to make those calculations but the point is important.

The reason that mainstream economists believe the dependency ratio is important
is typically based on false notions of the government budget constraint. So
a rising dependency ratio suggests that there will be a reduced tax base and
hence an increasing fiscal crisis given that public spending is alleged to rise
as the ratio rises as well. So if the ratio of economically inactive rises compared
to economically active, then the economically active will have to pay much higher
taxes to support the increased spending. So an increasing dependency ratio is
meant to blow the deficit out and lead to escalating debt.

These myths have also encouraged the rise of the financial planning industry
and private superannuation funds which blew up during the recent crisis losing
millions for older workers and retirees. The less funding that is channelled
into the hands of the investment banks the better is a good general rule.

But all of these claims are not in the slightest bit true and should be rejected
out of hand. It is not a financial crisis that beckons but a real one. Are we
really saying that there will not be enough real resources available to provide
aged-care at an increasing level? That is never the statement made.

The actual challenge of an ageing population is that more real
resources will be required "in the public sector" than previously. But as long
as these real resources are available there will be no problem. In this context,
the type of policy strategy that is being driven by these myths will probably
undermine the future productivity and provision of real goods and services in
the future.

The irony is that the pursuit of budget austerity will undermine the ability
of nations to provide these required flows of real goods and services. Fiscal
austerity entrenches unemployment and usually leads governments to target public
education almost universally as one of the first expenditures to be reduced.

Most importantly, maximising employment and output in each period is a necessary
condition for long-term growth. The emphasis in mainstream integenerational
debate that we have to lift labour force participation by older workers is sound
but contrary to current government policies which reduces job opportunities
for older male workers by refusing to deal with the rising unemployment.

Consider the state of the teenage labour market in the US – these are the
workers of the future. The more productive they are the more likely that the
US will be able to continue to provide high material standards of living to
its citizens over the next 40-50 years.

If you wanted to see the real dependency problem in the US you might start
with this graph which is taken from US Bureau of
Labor Statistics data (Labour Force Survey) and shows the teenage (16-19
years) unemployment rate. It currently stands at 24.5 per cent.

Making a job available to all those who desire to work will have a positive
impact on the true dependency ratio is desirable. But policies which entrench
unemployment and encourage increased casualisation which allows underemployment
to rise are not a sensible strategy for the future. The incentive to invest
in one's human capital is reduced if people expect to have part-time work opportunities
increasingly made available to them.

These issues are about political choices rather than government finances.
The ability of government to provide necessary goods and services to the non-government
sector, in particular, those goods that the private sector may under-provide
is independent of government finance.

Any attempt to link the two via fiscal policy "discipline:, will not increase
per capita GDP growth in the longer term. The reality is that fiscal drag that
accompanies such "discipline" reduces growth in aggregate demand and private
disposable incomes, which can be measured by the foregone output that results.

Clearly surpluses helps control inflation because they act as a deflationary
force relying on sustained excess capacity and unemployment to keep prices under
control. This type of fiscal "discipline" is also claimed to increase national
savings but this equals reduced non-government savings, which arguably is the
relevant measure to focus upon.

Feldstein is among the senior economists who choose to ignore these realities.
He is obsessed with privatisation and deregulation and so constructs everything
within that lens. So his solution to the "impending fiscal crisis" is to propose
a private "investment based accounts" as the basis for future Social Security
in the US.

He claims that:

The challenge is how to assure that future retirees have accumulated
adequate investment-based accounts to supplement Social Security and Medicare.
Experience in a wide range of companies shows that a voluntary system can
work if employees are automatically enrolled to have payroll deductions
deposited into such accounts. Even though employees have the option to stop
depositing, they do not do so. Inertia is a powerful force.

No, the challenge is to assure that future retirees have access to the desired
level of real goods and services. The pension payments from government should
be pitched at a level that provides an adequate access. That is not a challenge
at all for a sovereign government. The challenge is ensuring there are the real
goods and services available.

It might be politically determined that the society does not want the aged
to have such access and future governments would have to deal with that political
mandate and presumably cut aged pensions. But that would not be driven by any
fiscal issue. As long as there is a mandate to provide a certain level of pension
support and that level was backed by the availability of real goods and services
then the US government will be able to honour that provision.

Feldstein knows that. But he wants a greater access to real goods and services
for himself and his ilk and that can be more easily accomplished by denying
access to others via spurious arguments about affordability.

Conclusion

The idea that it is necessary for a sovereign government to stockpile financial
resources to ensure it can provide services required for an ageing population
in the years to come has no application. It is not only invalid to construct
the problem as one being the subject of a financial constraint but even if such
a stockpile was successfully stored away in a vault somewhere there would be
still no guarantee that there would be available real resources in the future.

The best thing to do when faced with an ageing population is to maximise
incomes in the economy by ensuring there is full employment. This requires a
vastly different approach to fiscal and monetary policy than is currently being
practiced.

This should be accompanied by a strong commitment to public education to
ensure that the potential of all citizens irrespective of private means or background
is maximised.

If there are sufficient real resources available in the future then their
distribution between competing needs will become a political decision. Economists
have nothing to say about that.

Long-run economic growth that is also environmentally sustainable will be
the single most important determinant of sustaining real goods and services
for the population in the future. Principal determinants of long-term growth
include the quality and quantity of capital (which increases productivity and
allows for higher incomes to be paid) that workers operate with. Strong investment
underpins capital formation and depends on the amount of real GDP that is privately
saved and ploughed back into infrastructure and capital equipment. Public investment
is very significant in establishing complementary infrastructure upon which
private investment can deliver returns. A policy environment that stimulates
high levels of real capital formation in both the public and private sectors
will engender strong economic growth.

The worst thing for a government to do is oversee persistent unemployment
and rising underemployment. The next worst thing they can do is hire lackeys
like Feldstein to misrepresent the worst thing they are doing!

Postscript

Since when do people who end speeches with God Bless and all others who profess
a love for humanity and forgiveness find it acceptable to publicly express satisfaction
that another human being is dead No matter what that person did an eye for an
eye is a poor basis for justice. Please don't assume I support anybody or any
cause – I just prefer consistency.

Corporate profits in the second quarter grew to $1.1.467 trillion annualized-up
from $1.455 trillion in the fourth quarter (previously $1.476 trillion).
Today's report includes annual revisions. Profits in the second quarter
rose an annualized 3.3 percent, following a 39.9 percent surge the quarter
before (previously 35.2).

If the economy is flat and perhaps heading lower, why are corporate profits
higher?

Aside from some built-in momentum from past inventory build-up and effciencies
related to technology, one can only look to the dollar and its benefit to U.S.
exporters as being the key factor behind corporate profits. By devaluing the
dollar multinationals have done well abroad. Domestic consumer sales and disposable
income are something else. Dollar devaluation is the unofficial policy of the
U.S. But like most well-intentioned government policies, there is greater harm
done by devaluing the dollar. It is the apparently "unseen" consequences of
devaluation that policy makers fail to consider.

The "printing" of money (money inflation), either through artificially induced
credit expansion or through quantitative easing, is the cause of dollar devaluation.
The "unseen" result is that it causes a loss in value of the dollar. As well
the dollar declines in value compared to other world currencies. This means
that consumers of domestic and imported goods have to pay more. We become poorer
because the dollar buys less. It also results in the consumption of capital,
which is another way of saying the destruction of capital.

Thus the majority of Americans suffer more because of price inflation. The
multinational exporters get the benefit because American made goods are cheaper
for foreign buyers.

When a distinguished "conservative" economist like Martin Feldstein recommends
more quantitative easing and dollar devaluation to aid exports and profits for
multinationals, it illustrates this very flawed conventional thinking. In a
Bloomberg article praising the junk dollar as creating a "bright spot" in
the economy, Feldstein says:

"A lower dollar means more exports, and it also means a shift from consuming
imported products to consuming goods and services that we produce in the
United States," said Harvard University economics professor Martin Feldstein
in a telephone interview. …

The weakening currency has another benefit for the U.S., according to
Feldstein, who's also a member of the Business Cycle Dating Committee of
the National Bureau of Economic Research, which determines when recessions
start and end. "One of the things about the declining dollar is that it
doesn't add to the national debt," he said.

So why does Professor Feldstein favor the multinationals over consumers?
He thinks that it creates manufacturing jobs which are better than other jobs
and that will lead to our economic recovery. This concept is a mystery to me.

The idea that manufacturing jobs are more valuable and pay higher wages
than other jobs, especially service industry jobs, is simply not true.
Last year I did a simple analysis of services wages vs. manufacturing wages
(admittedly not that "scientific," but still based on NIPA numbers) and found
that if you averaged all the wages of all sectors in each industry, their wages
were almost identical (latest data: 2008):

This
makes services a large and powerful force in the economy. Also, manufacturing,
despite
common myths to the contrary, is still an important sector in our economy,
just not as great a percentage of GDP as it was before. But don't worry:
this phenomenon has been occurring worldwide. Why? Because of the
technology revolution:

So when I see a distinguished conservative economist like Martin Feldstein
recommend more quantitative easing and dollar devaluation to aid exports, I
am dismayed by his flawed thinking. As if that isn't enough, he recommends
more quantitative easing:

Policy makers, particularly at the Fed, are running out of monetary tools
to stimulate the U.S. economy. Another round of asset purchases would prompt
a quicker decline in the dollar, according to Feldstein. "If they did a
QE3, the domestic effect of that would be relatively small," Feldstein said.
"We'll get some of it, potentially, through the exchange rate, so that would
simply accelerate this exchange-rate effect."

Let me translate what he is really saying:

I advocate devaluing the dollar because it will result in a destruction
of valuable capital necessary for future growth. I don't particularly care
about the fact that it will cause further price inflation and that American
savers and consumers will become poorer because their dollar will buy less
at home and abroad. I don't care either that QE hasn't worked yet to revive
the economy. What I care about is that the big multinational corporations
continue to do well at the expense of most Americans. As you know
I am a well-known professor of economics at Harvard, a one time candidate
for Fed chairman, and I often consult with these multinational companies
for big money.

Why does he say those things? Is it because he has a big stake in the conventional
wisdom? From his
bio at Eli Lilly, he's been involved as follows:

Chief Executive Officer and President of National Bureau of Economic
Research, US. Dr. Feldstein serves as Member of International Advisory Board
of National Bank of Kuwait. Dr. Feldstein serves as Director of Council
on Foreign Relations, Inc. and AIG Aviation, Inc. Dr. Feldstein has been
Director of Eli Lilly & Co. since January 2002. Dr. Feldstein serves as
Member of Economic and Business Advisory Board of Warburg Pincus LLC. Dr.
Feldstein served as Director of TRW Aeronautical Systems since 1984. Dr.
Feldstein served as Director of American International Group, Inc. since
1987, HCA, Inc. since 1998 and J.P. Morgan & Co. Inc. since 1993. Dr. Feldstein
served as Director of Morgan Guaranty Trust Company of New York. Dr. Feldstein
served as Member of International Advisory Board of Rorento N.V.

He makes about $301,000 per year just from Lilly. (You can see his
multiple worldwide
connections as put together by Businessweek.)

I am not saying the man is corrupt; far from it. But he is dead wrong. The
economy is stalled out because of such policies. More QE will devastate the
economy.

China has been gaming their currency, which means we are consuming products
for less than it costs to make them in china. They have been resisiting
revauation, but qe2 is causing increased inflation in china. Hence, china
has been forced to let their currency begin to rise. Thank heavens! We need
jobs, not cheap stuff, nealy for free. We have been over consuming cheap
chinese proucts and under producing jobs. Revaluation vis a vis the yaun
is a good thing and a free market thing.

Jeff: I need your help for improving my thought process. Say the dollar
is devalued a bit and that means more exports from American companies, but
since all the invoices will be raised in dollars then all the foreign customers
will have to purchase dollars, which means again the demand for dollars
will remain proportionately high. So in the mix how is dollar really devalued
for an American consumer?

Further, the American consumer on the other hand will find more jobs
available owing to higher exports, but as has been the case for long, the
imports are disproportionately higher than exports and hence the dollar
suffering value is imminent, purely due to trade imbalances. Now, if the
dollar devalues and the cost of imports goes up then very well the case
for improving manufacturing within the shores of US will enhance thus causing
a good way to create jobs and contain trade deficits. Service intensive
economies will suffer when the net export on manufactured products take
a beating. How much of the services really are generating exports and bringing
in dollars is the key question?
The statistics on the salaries are little misleading. If you closely look
at it, 50% of the manufacturing workforce earns ~ $17 and 50% of education
workforce earns ~$20; slightly leads to the point that education could be
unaffordable to the 50% of manufacturing populace? The case even more vindicating
for Healthcare of course sheerly due to the size of workforce for healthcare
and social services.

Thus I think it is rational to try increasing manufacturing exports (dollar
devalue) and help sustain the overall living standards and incomes across
all other types of services.

Venu, thank you for your comment and thanks for reading the Daily
Capitalist. A couple of points though.

1. Technically you are correct that foreign buyers have to buy dollars,
but consider the fact that we keep printing more dollars than there
is demand for so dollars pile up and are devalued relative to other
currencies.

2. Cheaper dollars increase exports but they also decrease imports.
How many jobs are lost based on that?

3. Service industries don't have to 'bring in dollars." The fact
is that imports have been growing since the early 1980s and yet our
economy has expanded despite that. Bastiat (and Smith) demonstrated
long ago that trade was good for us, and running a deficit is not important.
Especially with fiat money and freely floating exchange rates. A gold
system would automatically regulated such "imbalances."

4. The stats are not perfect as I point out, but the fact also remains
that this sector has grown hugely and yet we have still prospered (not
saying we haven't gone backward lately, but that since 1980, we've expanded).
Our backward slide has nothing to do with trade. Also, manufacturing
employment has dwindled not because we aren't still the largest manufacturer
in the world, but because of capital investment in technology which
makes those workers more productive.

5. What you are advocating is mercantilism and government regulation
of the economy to meet its political goals. Why favor factory workers
over software engineers? Do you think the government has a better idea
of where to apply money and labor than the market? I.e. why would you
substitute the decisions of millions in a decentralized efficient marketplace
with a few bureaucrats?

Jeff: Thank you very much for sharing your wisdom. The following
are my inputs on further thought:
1. The government is printing dollars purely because they do not
have the financial resources to sustain all of it's responsibilities
and owing to the popular Keynesian economists' ruling commandment
that in times of distress in economy the government has to catalyze
the economic forces. Question is what is the right level of stimulus
and how is the system seeing the circling back of the money towards
productive gains.
2. I am not very sure how many jobs will be decreased with reduced
imports. Again, a balance of imports-exports needs to be attained
what is the healthy ratio?
3. The period of mid 1980s to 2008 is going remain as an interesting
period for years to come as the geo-political matters along with
investor confidence in dollar achieved peak levels because wall
street became the driver for the entire global economy and drove
leverage to incredibly unimaginable levels.
4. The prosperity achieved through service industries is driven
by credit engines that successfully changed hands and the loser
in the end is the guy who stuck last in the chain and could not
get out of the credit cycle. What happens if the number of these
guys is incredibly high?
5. If free market economics really ruled then I am very positive
2008′s crash could have been averted. Talk of the stimulus funds
to financial institutions that ended beefing up only their cash
reserves but did not help the economy, question is why did this
happen if market based economics was the real driver?
I am not in favor of more government interference than required.
Obviously, you cannot run an economy only on software engineers;
a guy who's been all along in the construction industry for 20 years
cannot migrate to software development and this mobilization will
not be smooth without sacrifices at the personal and economy levels,
which is what Goldsmith prophetically suggested in 1994 about GATT.
Now, in a decentralized economy the individual entities might be
optimizing locally but what about a large scale optimization which
addresses the economy as a whole.

The dollar is the worlds reserve currency, and has been since we defaulted
on the Bretton Woods act in 1972. The only reason any country has a need
to purchase our continuing inflated currency, is the fact that, in order
to buy oil from O.P.E.C. a country must exchange their currency for U.S.
dollars. This is the agreement Nixon made with "Saudi" Arabia back in 1972
in exchange for their protection. From that point on, the feds have had
the ability to print money at will. Increasing M2 supply only leads to commodity
inflation and less purchasing power. What we need is less demand for U.S.
currency, so we can began to balance the money supply, and reduce price
inflation as a result of these QE's, which have been all but wiped out since
the recent market crash. It appears Wall Street wants more QE to artificially
stimulate the stock market, and preserve the wealth of those invested. The
poor suffer greatly, by increasing food and energy prices. If you don't
believe me, how much was gas before all this QE began. What about corn,
sugar, coffee. In fact, check the prices of all commodities before QE began.
All QE is — is a stimulus for the rich — a enormous transfer of wealth from
the poor and middle class to the wealthy. It appears that our officials
are interested in protecting the wealthy, while asking the poor and middle
class to "eat cake."

These failed fed policies coincide with failed Obama policies. If our
president would have spent his first two years in office massaging the small
business, and stimulating entrepreneurs, with grants and loans, we wouldn't
be in this fiscal mess. As far as these companies are concerned, they have
made so much money from exporting their goods and services that they have
hoarded the cash. The government allows them to hide their money in banks
internationally, without repatriating those dollars here in the states.
The companies claim they are over taxed. Hmmm. I wonder if G.E. felt over
taxed last year after not paying any taxes and receiving billions in tax
credits. This country has lost a sense of itself. This is apparent by the
pugilism between parties in Washington.

QE is damaging the country. If the U.S. is mad at China, then change
our trade policies! But instead, they would rather play currency wars, and
drive the world into poverty, while preserving the wealth of the irresponsible
persons who cause this problem in the first place. One last thing: In my
industry, back in the early 1990′s a production manager was paid and average
salary of 65k to 75k. Gas was just over a dollar than, and the average home
in Los Angeles was well under 200k. Unfortunately, those wages are the same
now for those jobs, and since than, we see how much gas and food have risen,
and if you can even get a loan for a home — why buy one? You may not be
employed long enough to keep it!

QE is a destructive fed policy that should have only been used to unfreeze
the credit markets and not to stimulate Wall Street and protect the rich!

More on Martin Feldstein

ProGrowth Liberal just posted interesting information about Martin Feldstein
on Social Security. Here is an extract from my new book, The Confiscation of
American Prosperity, regarding Feldstein's obsession with the subject.

Feldstein first came to national attention in 1974, the same year that Arthur
Laffer produced his famous napkin. Feldstein published a model that "proved"
that Social Security caused enormous losses for the US economy. According to
Feldstein, Social Security was reducing personal savings by 30 to 50 percent.
He estimated that if Social Security had not existed, the stock of plant and
equipment in the United States would have been as much as 50 percent larger
and total personal income 20 percent greater than the level in 1971 (Feldstein
1974). Since Social Security had only been functioning 24 years at the end of
the time period that his data covered, Feldstein's article implies that the
present effect of Social Security on total personal income today would be far
higher ‑‑ perhaps almost 50 percent since the program has had another 35 years
at the time of this writing.

The same Jude Wanniski, who popularized supply side economics, later recalled,
"I came across a paper that a fellow at Harvard had written on Social Security,
saying it was causing the national saving rate to decrease. And I thought, 'Great
.... I've got to publish it'" (Bernasek 2004). In other words, because Feldstein's
results were welcome, people of influence rushed to embrace him.

The only problem was that Feldstein's work was seriously flawed. A few weeks
before the election of Ronald Reagan at the 1980 annual meeting of the American
Economic Association in Denver and after Feldstein had already ascended to the
head of the National Bureau of Economic Research, two less famous economists,
Selig D. Lesnoy and Dean R. Leimer, reported that they were unable to replicate
Feldstein's results (later published as Leimer and Lesnoy 1982). Upon analyzing
Feldstein's work, they discovered that his results critically depended upon
an elementary programming error. With that error corrected, Feldstein's data
no longer had the disastrous effects Feldstein claimed. Instead, his model showed
that Social Security could have actually had a positive impact on savings.

In all fairness, errors in economic model building are extremely common. In
1982, the Journal of Money, Credit, and Banking began a project to replicate
previously published articles. The results were unsettling to say the least.
Sixty‑six percent of the authors were unable or unwilling to supply the materials
necessary to rerun the model. The authors who responded did so after an average
delay of 217 days. All but one of these articles had problems, including programming
errors, such as Feldstein committed (Dewald, Thursby and Anderson 1986). This
project was hardly likely to inspire confidence in the scientific rigor of economics.

Feldstein admitted his programming error. Undeterred, he soon rejiggled his
model. By adding a few new assumptions, he was able to "prove" once again that
Social Security was still destructive. Some years later, in 1996, Feldstein
gave his own Richard T. Ely lecture. There, Feldstein regaled his audience with
new data demonstrating one more time the harmful effects of Social Security.
According to Feldstein, the present value of privatizing Social Security would
be an astounding $20 trillion dollars ‑‑ about twice the GDP of the United States
(Feldstein 1996, p. 12).

In a 2005 Wall Street Journal opinion piece, disingenuously entitled, "Saving
Social Security," Feldstein returned once more to his bête noire. This time
he was arguing in support of an unpopular piece of Republican legislation to
mix Security and private accounts. Feldstein promised great benefits from this
"reform": "A higher national saving rate would finance investment in plant and
equipment that raises productivity and produces the extra national income to
finance future retiree benefits" (Feldstein 2005b). So, Feldstein would rescue
Social Security by gutting it.

Earlier in the year, the American Economic Association had given Feldstein a
platform to renew his attack on Social Security in his presidential address.
Here Feldstein adopted a new pitch. He protested that the program did too little
to redistribute income from the rich to the poor. His argument was that because
the rich live longer than the poor, they will have more opportunity to benefit
from Social Security (Feldstein 2005a).

Without bothering to contest Feldstein's questionable calculations about the
redistributional impact of Social Security, this last attack is especially notable
for its unusual rhetorical turn. Not too long ago, the same Professor Feldstein
discussed the question of inequality with the New York Times. Feldstein began
as if he took the subject seriously, observing, "Why there has been increasing
inequality in this country has been one of the big puzzles in our field and
has absorbed a lot of intellectual effort." Feldstein's own intellectual effort
in this debate left something to be desired. Rather than address the question
of inequality seriously, he merely trivialized the question, responding to the
reporter: "But if you ask me whether we should worry about the fact that some
people on Wall Street and basketball players are making a lot of money, I say
no" (Stille 2001).

This dismissal of the question of inequality was not some uncharacteristic,
off‑hand remark. In an earlier article, entitled, "Reducing Poverty Not Inequality,"
Feldstein described the proper approach to an imagined increase in inequality
occurring because a small number of affluent people received $1000 each at no
cost to the rest of society. For Feldstein, only a "spiteful egalitarian" would
not welcome such an improvement in society (Feldstein 1999, p. 34).

Of course, Feldstein and his fellow 'spiteful inegalitarians' have been adamant
in their hostility to any redistribution of income toward the less fortunate.
Such policies threaten to hinder the magical trickle down upon which all progress
supposedly defends. Suddenly, however, when it gave credence to his attack on
Social Security, Professor Feldstein refurbished himself as a populist advocate
of redistribution of income from the rich to the poor by arguing that Social
Security benefited the rich. Professor Feldstein never bothered to explain why
the rich are so hostile to this program that benefits them so lavishly.

One might expect such a flurry of conflicting arguments from an unscrupulous
salesman who wants to earn his commission from a confused customer, but not
from one of the most prominent academic economists in the country. One might
suspect that ideology rather than an objective search for the truth is at work.

Feldstein did not limit his political activism to Social Security. For example,
he used the Wall Street Journal to publicize his work predicting that Clinton's
economic taxes would harm the economy while raising little revenue (Feldstein
1993). Unlike his Social Security work, this article made a specific prediction.
Unfortunately for Feldstein, his estimates turned out to be demonstrably false.
The economy experienced a sudden burst of prosperity during the rest of the
Clinton administration.

Alicia H. Munnell, a former student of Feldstein whom he thanked in the acknowledgements
to his original Social Security paper and who later rose to become a member
of the President's Council of Economic Advisers and Assistant Secretary of the
Treasury for Economic Policy, offered this damning verdict in a Business Week
article following the Denver meeting: "I get the feeling that the NBER does
adopt a position on an issue ‑‑ explicit or implicit ‑‑ and then they go about
generating research to support the position" (Anon. 1980). In light of Feldstein's
later work, I see no reason to revise her evaluation.

Even if an economist avoids rudimentary programming errors and questionable
procedures in handling the data, problems with economic models still remain.
The economy is far too complex to reduce it to a mathematical equation or a
computer model, even a very large and sophisticated one. As a result, such models
necessarily rely on simplifying assumptions.

Although Feldstein proved nothing with his unrelenting attacks on government
programs, he demonstrated how clever economists, armed with sophisticated mathematical
and statistical techniques, along with the help of well‑trained graduate assistants,
are capable of manipulating models to get whatever results they desire. As economists
like to joke, that if you torture the data long enough they will confess. So,
although economists such as Feldstein can give their work the appearance of
scientific precision, their work must necessarily remain suspect.

For example, Social Security's presumably negative effect on saving was at the
core of Feldstein's model, but saving has a contradictory effect on the economy.
Some models assume that saving encourages investment, while others assume that
saving depresses demand, which, in turn, holds back investment. No matter which
assumption about the effect of saving economists choose, they can point to reputable
theories and models that support them. Admittedly, as economists marginalized
Keynesian theory, the models that show the positive influence of saving have
become more common. That shift does not reflect an advance in knowledge, but
rather a consequence of the right‑wing offensive.

Also, economists can pick and choose among various time periods and data sets,
avoiding combinations that do not confirm what they want to find. While such
models ‑‑ including many of the models to which I have referred in this book
‑‑ might suggest new lines of research or raise questions about previously accepted
truths, they cannot constitute proof by any means.

So, economists may build their models and pundits or politicians can foist the
results of these models on the unsuspecting public as if they were scientific
evidence, but they are not grounded in science. For example, almost two decades
after the errors in Feldstein's original model had been revealed, conservative
ideologists, such as those at the Heritage Foundation, still continue to trumpet
his long‑discredited calculation as serious evidence of the damage done by Social
Security (see, for example, Mitchell 1998).

I believe that Social Security is one of the most effective government programs
ever devised in the United States, but I can neither prove nor disprove that
assertion with a computer model. In fact, Feldstein's results might possibly
turn out to be correct after all, but nobody can know for certain. Different
economists have come up with a wide range of estimates (see Lesnoy and Leimer
1985).

Unfortunately, the public rarely has the opportunity to hear about the full
range of economic information. Ideological filters determine who gets hired
or tenured in economics departments. Those economists who manage to defy the
conventional wisdom face the added barrier of getting their work published in
"reputable" journals. Even if such papers manage to find their way into journals,
they lack the "megaphone" of powerful agencies, such as the Heritage Foundation,
which give wide distribution to long‑discredited material without much fear
of being exposed. So, ultimately what the public learns about how the economy
works are those results that conform to the desires of the rich and powerful.

13 comments:

Robert Barro was reflecting on his Ricardian Equivalence paper several years
after its 1974 publication and came to what he thought the effect that a
Social Security program would have on national savings. His answer - none.

Some economists remind me of Jeremy Irons' character (one of two) in Dead
Ringers. Sanity fraying, he designs surgical instruments which could inspire
H.R. Giger. After mangling a patient's body with the instruments, his twin
brother (also Jeremy Irons) removes him from the operating room. The visionary
protests, "There's nothing the matter with the instrument, it's the body.
The woman's body is all wrong!"

Lets not forget that when it comes to Social Security almost none of its
opponents are willing to fight fair.

They freely draw dates and Infinite Future dollars that rely on a specific
economic model and then simply refuse to discuss the details of that model.
It is not that their arguments for Intermediate Cost or against Low Cost
are unconvincing, they simply don't exist.

Given the movement in time of both Shortfall and Depletion, with the later
moving from 2029 in the 97 Report to 2041 in the 2007 you would think the
obvious questions would be "What changed?" and "Can it continue?" Good luck,
they simply refuse to go there, probably because they wouldn't like what
they would find.

It is interesting that at times you can know from the context of their commenting
that they are thoroughly familiar with the data, some of this can only come
from actual reading of the Reports. The problem is not fundamentally one
of education, for the most part this is not being discussed from an actual
economic position at all.

Why are they so insistent? Simple they hate FDR and the New Deal and
always have. They don't dislike Social Security because it is broke, they
hate it because they see it as Socialism. And it is all the more infuriating
that they can't assault it head on. People like Social Security. Which drives
Randites and their Fellow Travellors nuts. (Well for a substantial fraction
you could substitute 'putt' for 'drive' on the nuttiness front.)

When I try to view our blog the normal way, I get only the first couple
of paragraphs out of the first post. I see a few comments to my post so
maybe it's just my computer, but does our blog page have a bug?

the scary part is that no one else cares to discuss the details either.
i could understand the Randians true believing their arguments and numbers,
but the complete blackout on honest discussion in the press worries me.

[Martin Feldstein] estimated that if Social Security had not existed,
the stock of plant and equipment in the United States would have been as
much as 50 percent larger and total personal income 20 percent greater than
the level in 1971 (Feldstein 1974).

Excellent! No possibility of overinvestment and all the nasty phenomena
associated with it -- what a wonderful theory (ideology). Still, benefit
of doubt, he may have been influenced by a recent trip to then new DisneyWorld.

the money going into soc sec goes right back out again in benefits or to
government borrowing from the trust fund.

any stock market investments that replaces SS woud still have to pay out
every day exactly what SS pays out in order for the investors to have something
to live on in their old age... so that money is not available to compound.

i can think of a few other problems with the idea that SS hurts "savings,"
but i am no economist and wonder if i am missing something.

on the other hand i am not encouraged to wade through long and difficult
arguments that turn out to be based on false assumptions.

i believe he was doing a 'what if' -- what if ss had never been created
and same money had been used for investment in plant and equip. ..then there
would have been 50% more production capacity and wages would have been much
higher.

which entirely ignores that, within capitalism, overproduction of means
of production is not only possible but made evident with every recession,
and that this is not conducive to higher wages but, instead, higher unemployment.
50% more industrial capacity in 1971 would only have made those years' recessions
worse, including a still more severe fall in rate of profit than did take
place.

Feldstein must have still been suffering 1960s' business cycle conquered
delusions, must have been like these guys:

Samuelson: 'by means of appropriately reinforcing monetary and fiscal policies,
our mixed-enterprise system can avoid the excesses of boom and slump and
look forward to healthy progressive growth'.
Harrod, 1969, 'full employment should now be regarded as an institutional
feature of the British economy'.
Stoleru, 1970: 'It has often been said that a crisis such as the Great Depression
could no longer take place today, given the progress made in techniques
of state countercyclical intervention. These claims, presumptuous as they
may seem, are not without foundation.'

Other hand, these folks in Belgium:

1969: 'This Marxist analysis reached three conclusions: first, that the
essential motor forces of this long-term expansion would progressively exhaust
themselves, in this way setting off a more and more marked intensification
of interimperialist competition; secondly, that the deliberate application
of Keynesian antirecessionary techniques would step up the worldwide inflation
and constant erosion of the buying power of currencies, finally producing
a very grave crisis in the international monetary system; thirdly, that
these two factors in conjunction wuld give rise to increasing limited recessions,
inclining the course of economic development toward a general recession
of the imperialist economy. This general recession would certainly differ
from the great depression of 1929-32 both in extent and duration. Nonetheless,
it would strike all the imperialist countries and considerably exceed the
recessions of the last twenty years. Two of these predictions have come
true. The third promises to do so in the seventies.'

How wonderful. Yet another thread of discussion which lends evidence to
the theory that the social sciences, economics in particular, are subject
to the subjective interpretation of data. What a surprise. The researcher
discovers that which he intended to discover, or that which he expected
to discover. Sounds like the old Rosenthal Effect to me. A research phenomenon
that a guy named Rosenthal demonstrated about 45-50 years ago. And this
is news to professional economists?

So now that michael has done a rather superb job of demonstrating that one
of academia's most distinguished economists is either a liar or a dumb schmuck,
what is the lay man to expect from the field of economics? And why on earth
are economists given any significant role in planning and structuring economic
policy? Let's see, Friedman was a great thinker, but he and his Chicago
buddies went around the world destroying economies. Greenspan supported
every stupid decision of the Bushites, but now disavows any agreement with
their economic activities. And Feldstein is a dissembler of the highest
order. The only thing I don't like about this run of mediocre thinking is
that they're all very bright Jewish guys and we're supposed to be more thoughtful
regarding science and the search for truth. Not a good reflection. Can I
move that they be excommunicated?

"Out of a shortlist of twenty of the best known, most respected and influential
philosophical thinkers, nominated by the In Our Time audience, Karl Marx
has been voted the Greatest Philosopher of all time by BBC Radio 4 listeners.
[...]
In Our Time, presented by Melvyn Bragg, ran the online poll over a period
of five weeks and attracted over a million hits to its extended website.
[...]
Nominee % Accepted votes
1. Marx 27.93%
2. Hume 12.67%
3. Wittgenstein 6.80%
4. Nietzsche 6.49%
5. Plato 5.65%
6. Kant 5.61%
7. Aquinas 4.83%
8. Socrates 4.82%
9. Aristotle 4.52%
10. Popper 4.20%

Coming late to this one also. Glad that the Nobel did not go to Feldstein,
which Mankiw thinks should happen because he has been so heavily cited.
This latter fact is enough to make me nauseated. Feldstein is one of the
most egregiously execrable of prominent economists around, given his long
and sleazy campaign against social security.

One obvious point to me is that the US economy grew considerably more rapidly
during the 1945-73 period than during any other comparable period earlier
(more in the 1880s, but not for so long). Does he really think the economy
would have grown faster without social security? It is just patently ridiculous
drivel of the worst sort.

Wednesday, September 20, 2006

This interview with Marty Feldstein covers
its share of controversial topics. The
interview is fairly long, so if you want to
pick and choose the section headers are: The
Art of Monetary Policy, Time Consistency in
Fiscal Policy, Social Security Reform,
European Social Insurance, European Union,
The Return of Saving, The Economics of
Health and Health Care, Executive
Compensation, Supply-Side Economics, Tax
Reform Panel, and The NBER:

As a policy adviser, he chaired the
Council of Economic Advisers during the
Reagan years, and landed on the cover of
Time magazine in 1984 for his
controversial opposition to a growing
budget deficit. He has a lower profile
in Washington these days but remains
extremely influential, helping the
current administration develop its tax
cut initiatives, for instance.

And as president of the National
Bureau of Economic Research, the
nation's preeminent economics think
tank, Feldstein has shaped the course of
economic scholarship for almost three
decades: identifying key issues,
encouraging empirical research, creating
opportunities for cooperation and
disseminating working papers of leading
economists long before they appear in
academic journals.

But years from now it is likely that
Feldstein will be best remembered as a
prescient public citizen, a scholar who
identified some of the most serious
economic predicaments of our time,
developed pragmatic solutions to those
problems and then pressed
policymakers—persistently—to implement
them.

Social Security. Health insurance.
Distortionary taxes. Unemployment
insurance. The current account deficit.
These are the issues that Feldstein has
pushed to the forefront of popular and
policy agendas decade after decade.
Through a prolific stream of
professional articles, newspaper columns
and scholarly books, as well as frequent
speeches and media interviews, he
maintains a stark spotlight on crises
that others try to ignore.

Educated at Harvard and then Oxford,
Feldstein returned to Harvard as an
assistant professor in 1967 and two
years later became one of the youngest
economists granted tenure by the
university. In 1977, he won the John
Bates Clark award as the best American
economist under 40.

Numerous achievements and awards have
followed, but Feldstein seems most
gratified by close collaboration with
colleagues. In the following interview,
held during a break from the NBER's 2006
Summer Institute, a three-week gathering
in Cambridge of about 1,400 economists,
Feldstein notes that earlier in the day
Paul Samuelson compared the Institute to
Niels Bohr drawing atomic physicists to
Copenhagen in the 1920s. “I thought that
was a nice sentiment,” Feldstein
comments quietly. His smile suggests
that he could hardly conceive of higher
praise.

THE ART OF MONETARY POLICY

Region: In recent
articles reviewing the tenures of Alan
Greenspan at the Fed and Otmar Issing
[former chief economist of the European
Central Bank], you observed that
monetary policy is as much an art as a
science, that judgment must supplement
forecasting models and policy rules.
Given that, what is your
judgment on the current course of
monetary policy? I know you're not an
advocate of strict inflation targeting,
but then what should be done to
anchor inflation expectations, either
through explicit policy measures or
improved communications?

Feldstein: The
rhetoric that has worked for the last
20-plus years since Paul Volcker took
over was an emphasis on “price
stability.” That didn't come with a
precise number, but I think he defined
price stability—and Greenspan used
similar language—as meaning that price
changes should be so low that people
ignore them. And “price stability”
actually has, in many ways, a better
ring than “2 percent inflation.” Why 2
percent inflation? Why not 3 percent
inflation? Why not zero? I think what
the public wants is price stability.
They don't want to have prices rising.
In practice, because of imperfections in
measurement and because of concerns
about deflation, you end up with a
number globally now around 2 percent,
and that strikes me as quite plausible.

The financial markets may like
something reasonably precise, like 1, 2,
3 percent as measured. I say “as
measured” because of the statistical
bias in the numbers so that true
inflation is lower than the measured
number. The man on the street doesn't
want to be concerned about small numbers
and/or about “core” inflation versus
“regular” inflation. He wants price
stability; he wants the purchasing power
of the money that he has to stay the
same. And so that's what the Fed's
message to him ought to be.

Region: How can that
best be communicated?

Feldstein: I think
it was successfully communicated during
the Volcker and Greenspan eras. And
Volcker started with much higher
inflation rates, so it was the more
difficult sell. By the time he left, the
inflation rate was down to about 4
percent as headline inflation is
conventionally measured, and Greenspan
took it down to roughly 2 percent and
then it overshot a little bit on the low
side.

So I think it got communicated that
the problems of inflation we lived with
in the '70s were history and that the
Fed was committed to not letting that
happen again. It was done without
putting a precise number on it, but by
reacting to increases in inflation. The
public looks at how the Fed responds,
not just at what they say. It's easy to
say, "I believe in price stability." But
if you don't do something, then no
matter what number you put out there,
they're not going to believe it.

TIME CONSISTENCY IN FISCAL
POLICY

Region: Economists
have devoted a lot of attention to time
consistency in monetary policy. Some
suggest that time consistency in fiscal
policy would also be a good idea. Given
your research on public finance, do you
think there's wisdom in such a stance?
And given your experience in Washington,
do you think it's pragmatic?

Feldstein: When I
look at the current fiscal situation, in
contrast to what we experienced in the
'80s when the fiscal deficits were
larger and rising, and debt-to-GDP
ratios were rising, we're currently at a
relatively comfortable level. The
federal deficit-to-GDP ratio this year
will be under 3 percent, probably low
enough that the debt-to-GDP ratio will
actually come down.

The problems are not that very far
into the future, though, with increases
in Social Security and Medicare costs
relative to the tax revenue that comes
in. The markets seem to be ignoring
that, which is a puzzle, but there's
nothing about long-term interest rates
that suggests that the markets are
afraid that Social Security and Medicare
are really going to create large fiscal
deficits. Now maybe they're right. And
maybe the political process will raise
taxes or cut benefits. What has to be
done is to reform those programs. I
wouldn't set my goal in terms of the
fiscal deficit. I'd set it in terms of
limiting the tax levels that are going
to be needed to support them.

SOCIAL SECURITY REFORM

Region: For nearly
40 years, you've been a powerful
advocate for reform of the Social
Security system, especially for personal
retirement accounts.

Feldstein: Right.

Region: But a case
could be made that the system is largely
unchanged from when it was first
created. Are you discouraged by the lack
of progress that's been made, or
heartened by the incremental changes?

Feldstein: There've
been no good incremental changes. There
have been incremental changes, but
they've gone the wrong way until about
10 years ago. Since then there have been
changes, particularly getting rid of the
distortions in retirement incentives by
raising the benefits if you work longer,
reducing the benefits if you retire
earlier. So the distortions in
retirement behavior that affect the
European economies are no longer present
in the United States.

But the reforms of Social Security
and the movement to personal retirement
accounts are happening around the world
now, and the United States is really a
laggard. And it's not just some of the
developing countries, like Chile and
Mexico. It's Australia and even Sweden
that have moved to mixed systems with an
investment-based component. So I'm
encouraged that at some point the United
States is going to move in that
direction.

If you'd asked me two years ago, I
would have said we have a president
who's committed to this and sees this as
his major domestic legacy, and therefore
I think he's going to get it. I can't
say that now. I can say the first half
of that, but not the second half. The
Democrats have been completely unwilling
to come and discuss the subject. It
doesn't look like anything the
administration can do will get them to
negotiate about it. There aren't enough
Republicans to do it. And it shouldn't
be done on a partisan basis. The
administration tried, by setting up a
bipartisan commission with Pat Moynihan
as one of its leaders, to come up with a
way of getting to that mixed system. But
they've not been able, and since
Moynihan died there's been no leadership
on that side of the aisle.

EUROPEAN SOCIAL INSURANCE

Region: You've
referred to several European countries.
I would think that the demographics of
Europe would be even less amenable to a
favorable future for government pension
programs. What is your sense of Europe's
future relative to social insurance for
the elderly?

Feldstein: You're
right. Their demographics are worse. We
would see the tax rate required to
support the U.S. Social Security pension
system rise to about 20 percent from the
current 12 percent if we wanted to
maintain the same benefit rules on a
pure pay-as-you-go basis. Europeans are
already up there. They have much higher
replacement rates. They have earlier
retirement. And for them it's going to
get even worse.

But as I said, we've seen
Sweden—which I think of as sort of the
leading edge of welfare states—backing
off the traditional pure pay-as-you-go
system and moving to this kind of mixed
system. Britain has very much a mixed
system. It's not exactly the same
structure, but it's very much a modest
pay-as-you-go part plus an
investment-based part.

So, I think at some point it will
happen here. I don't know exactly what
the formula will have to be to cause
that to occur, but I think it will
happen. Israel, another country with a
tradition of very strong social welfare
programs, has made this transition so
that new people entering the labor force
contribute to a mixed system.

EUROPEAN UNION

Region: Another
question about Europe, if I may. In
1997, you wrote that ”on balance, a
European monetary union would be an
economic liability.” What is your
judgment of where the EMU stands today,
particularly since the recent reforms of
the Stability and Growth Pact?

Feldstein: Well, I
think it is a liability. I think that
the one-size-fits-all monetary policy is
seen as not working either for the
countries that have weak demand and
ought to have a more stimulative policy
or, on the other hand, for those that
are discovering they're becoming less
competitive because their domestic
prices are rising and they can't adjust
monetary policy. I wrote a piece on the
Stability Pact issue before the recent
reforms, but even before the reforms,
they weren't paying any attention to the
Pact. The basic problem is there's no
market feedback to discipline a country
that doesn't have its own exchange rate
or its own interest rate to warn them
against fiscal deficits.

Normally, a European country that
started running large fiscal deficits
would see that the increased risk of
their bonds would push up the interest
rate they had to pay, there would be a
flight from the currency and they would
see that that translates into inflation.
So they would have a lot of
market-driven warning signals. All that
is gone now. There's a 30-basis-point
difference between Italian and German
long-term interest rates because the
market doesn't believe that it can
discipline the Italians. If the Italians
run a large fiscal deficit, it's
effectively a European fiscal deficit.
It's not a specifically Italian one.

THE RETURN OF SAVING

Region: In a recent
Foreign Affairs article, you
argue that the downward trend in savings
by U.S. households will likely soon
reverse, and that that could cause some
near-term disruption. Could you explain
that prediction, and tell us how that
ties in with your recent op-ed in the
Wall Street Journal calling
for, I think your term was, a
“competitive dollar abroad.”

Feldstein: Right,
strong dollar at home, a competitive
dollar globally. Well, the brief history
of our savings rate is that from a
relatively low level it has been falling
ever since the early '90s. This is
household saving, not national saving.
Household saving was coming down from
around 7 percent of disposable income,
and by 2003 it had gotten to 2 1/2
percent of disposable income—a
remarkably low number.

That was not surprising since
people's wealth had increased quite
substantially, both because the stock
market—despite the fall in 2000—was up
substantially and because home values
were up. So people felt they didn't have
to save by reducing consumption. They
just looked at their 401(k)s and IRAs,
and at a time when asset prices were
going up, the wealth effect dominated.

The fall in the savings rate is a
reflection of the fact that we used to
have defined benefit pension plans and
we now have defined contribution plans,
plus the IRAs. All of that put the
increase in stock market value into the
individuals' hands rather than into the
companies' hands as it would have under
defined benefit plans.

Then saving fell very sharply in the
next two years, 2003 to 2005, about as
much as it had fallen over the last
decade and a half. It went from 2 1/2
percent to minus 1 1/2 percent. It's not
entirely clear what caused that. There
was a spurt in home prices, so there was
a sharp wealth effect. But the main
thing that drove it, I believe, was
mortgage refinancing. Mortgage
refinancing gave people a chance not
only to cut their monthly payments but
also to take out cash and use it to buy
things. Not all of it went into
purchases. Some of it went into paying
off other debt. Some of it went into
financial assets. But I suspect that
enough of it went into buying things to
drive the savings rate from plus 2 1/2
to minus 1 1/2 percent.

Well, that process of mortgage
refinancing is reversing now, and with
mortgage rates significantly higher, a
full percentage point higher than they
were a year ago, there isn't the
incentive for people to refinance. So I
think we will see a return to higher
savings rates. Whether it'll be 2 1/2
percent or it'll be higher than that, I
don't know, but I think there'll be a
natural turnaround in the savings rate.

If that happens relatively quickly,
it will cause a significant slowdown in
aggregate demand in this country. Of
course, many people are saying that we
need to improve our trade imbalance, and
in order to improve our trade imbalance,
we have to save more. I think this is
where the saving will come from. It will
not come from reductions in fiscal
deficits, which are already relatively
low. Nor will it come from increases in
business savings, which are quite
strong.

But to convert the rise of savings to
an improvement in our trade balance, the
dollar has to be more competitive. If we
simply have an increase in our savings
rate and nothing changes in the exchange
rate, then we will have, depending on
how much the savings rate goes up, a
slowdown or a downturn in aggregate
activity. We need to translate those
extra resources, that extra saving, into
an increase in exports and a reduction
in imports so that the total demand for
U.S. goods and services remains on
track, and the economy continues to
expand. And that's the way the market
ought to work: When the savings rate
goes up, the exchange rate becomes more
competitive, and Americans consume more
American-made products and services. So
that's the case for a more competitive
dollar.

In the [Wall Street Journal]
article, I said the government during
the Clinton and Bush years has been
sending out a confusing message by
saying that the United States believes
in a “strong dollar.” Now what exactly
does that mean? It seems to me what it
ought to mean is we believe in a dollar
that is strong at home, meaning that we
believe in low inflation. We believe in
protecting the value of the dollar when
the consumer goes to shop.

Region: Which is why
you distinguish between “strong” and
“competitive”?

Feldstein: Right. At
home versus globally. If we want the
dollar to stay strong relative to the
euro and Chinese renminbi and Japanese
yen, then when the savings rate goes up,
we're going to have a serious problem.
So I think somehow the message has to
get out that the government isn't just
concerned with the renminbi, which is
the only currency they seem to talk
about, but is concerned with making the
dollar competitive against all
currencies.

Region: If I'm not
mistaken, you moved markets a bit when
people might have presumed that a
competitive dollar meant a weak dollar.
You were quoted by the Financial
Times as estimating that a 30
percent to 40 percent devaluation might
be needed to help narrow the trade
deficit. Does it surprise you that you
can move markets in that way, that
you're that influential?

Feldstein: I don't
know that I moved markets, and I never
made a personal forecast of what it
would do. I have said that in the '80s,
when the dollar moved and the current
account deficit was relatively
smaller—it was 4 1/2 percent of GDP then
as opposed to 6 1/2 percent of GDP
now—it moved almost 40 percent in two
years.

Some of my colleagues who have done
detailed analytic calculations would say
that's the kind of number that it might
take now. That would not get us back to
balance, but just get the current
account deficit down to something like 2
or 3 percent of GDP, which would be
consistent with our external debt-to-GDP
ratio not rising. So I've quoted those
numbers, but I've never said those were
my forecasts. But these numbers are from
smart people who've put a lot of effort
into trying to estimate that.

ECONOMICS OF HEALTH AND
HEALTH CARE

Region: A change of
subject. Some of your first academic
papers were on the economics of health
care, in the United Kingdom in
particular. More recently, you wrote a
paper about health care economics that
was subtitled “What Have We Learned?
What Have I Learned?” How do you answer
those questions?

Feldstein: The first
paper I ever published was about health
care in Britain. I was a graduate
student in Britain at the time, and I
said what they needed to do was to
introduce some economic thinking.
Remember, it's a state-run system. You
need some cost-benefit analysis. Look at
the costs of doing things, look at the
benefits.

Over the last several decades in this
country, where of course it's much more
of a decentralized and market-driven
health care system than in the United
Kingdom, the combination of insurance
companies and employers has driven home
the message that a doctor, in deciding
what to do when a patient presents, is
no longer to ask, “What are all of the
things I could possibly do to help my
patient?” but rather, “What is the
cost-effective thing to do? Where do I
draw the line?”

So what do I think I've learned, and
we've learned? I think I've learned that
preferences were left out of all this,
that it was treated like an engineering
problem. Maybe preferences ought to be
in engineering problems as well, but in
any case, health care should reflect
individual differences in preferences.

In that article, I emphasized that
people have different preferences when
it comes to health. Of course, everybody
wants to be healthy. We all know that
smoking is bad for your health. We all
know that being overweight is bad for
your health. We all know that exercise
is good for your health. But many people
enjoy smoking and they enjoy eating and
they'd rather not exercise. And they're
aware of the consequences. So it's a
trade-off of preferences. And it may
well be that when I go to see the
doctor, in answering questions of how
much I want to spend, I may differ from
other people. Not because I have a
higher income, but because I have
different preferences about this. And
somehow the system ought to reflect
this. It ought to reflect the fact that
individuals have different tastes for
health versus other things and that a
one-size-fits-all kind of health care is
a mistake.

EXECUTIVE COMPENSATION

Region: You sit on
the boards of three major corporations:
AIG (American International Group), Eli
Lilly and HCA (Hospital Corporation of
America). I guess my segue here is
health and insurance. What is your view
of current debates over executive
compensation and corporate governance?
Are additional restrictions needed, or
should there be some loosening of
government oversight of corporations?

Feldstein: I think
the recent SEC, NYSE and accounting
rules have strengthened the role of the
board in a good way. I think boards are
working harder and treating themselves
as more independent of management. I
don't think there was a big problem
before. To me, the most basic aspect of
corporate governance is whether the
outside directors meet alone and do that
on a regular basis. Not much happens
during those meetings, but you have the
meeting so you have a chance to say,
without management present, “Well, how
do you think management is doing? And
what message should we give management
that would make things better?”

A board doesn't run a company, but it
can provide useful feedback to
management. That aspect of board
independence I think is a useful thing.
And when management is failing, a good
independent board will force a change of
management or even sell the company.

Region: Does recent
controversy about stock options reflect
a problem with the economics of
executive compensation and incentive
structures?

Feldstein: I guess
in the boards that I've served on I've
never felt that excess compensation was
a serious problem. There was a recent
NBER paper explaining why there's been
this n-fold increase in executive
compensation for the top companies.
Well, lo and behold, the top companies
are n-fold larger than they were 20
years ago, and so if you think about the
compensation in proportion to the size
of the business, in part because of
mergers, in part because of just growth
and the big ones growing more than
others, that gives you an explanation of
what's going on.

SUPPLY-SIDE ECONOMICS

Region: In the
mid-1980s, you pointed out that
“supply-side economics” was really just
a return to basic ideas about creating
capacity and removing government
impediments. But as used in current
parlance, the term seems to have a lot
to do with the elasticity of taxable
income. What's your rough estimate of
that elasticity, and what does that
imply about current tax policy?

Feldstein: Let me
back up first to the '80s and then talk
about taxes. I wrote a piece back then
called “The Retreat from Keynesian
Economics.” In it I said that the broad
outlines of the Keynesian economics that
had come to dominate policy were an
attitude that output depended on demand,
that high savings were a bad thing, that
a big government was necessary for
stabilization, for maintaining aggregate
demand, and could do more than that,
could manage the economy in all kinds of
ways.

By the time I wrote that piece
[Summer 1981], there was beginning to be
a retreat from all of those ideas. We
came to understand that what really
drove output in the long run, even in
the medium run, was not demand, but was
capacity and that a large part of that
was saving and investment. So contrary
to this earlier view, we were going back
to earlier ideas.

At that time, people—particularly in
the press—were looking for the new
vision. Who was going to be the new
Keynes? Where was this New Great Idea
going to come from? And I said, “No new
Keynes; no New Great Idea. Keynesianism
was a passing intellectual phase
associated with the Depression. Let's go
back to the basics that economists have
believed in more or less since Adam
Smith—with some modifications,
certainly; we've learned some things
along the line.” That's what supply-side
economics was about: It was about
creating capacity.

Now much of my own work over the
years has been about taxes and about the
response of households and businesses to
taxes in various ways. And in particular
if you look at the household response to
marginal tax rates, the typical
professional economist's view and also
that of most tax policy officials is
that people don't seem to respond very
much. If you look at the relationship
between labor force participation and
tax rates, or working hours and tax
rates, there's not much there. There is
for married women, who have more
discretion, but for single women, or men
between 25 and 60, there's virtually no
response of labor force participation.

I've argued that that's really
looking in the wrong place. The measure
of labor supply that matters is not just
hours. The relevant labor supply
includes human capital formation, choice
of occupation, willingness to take risk,
entrepreneurship and so on. All of these
affect income and tax revenue.

What's more, taxes cause a further
distortion that causes a “deadweight
loss,” that is, an economic
inefficiency. Taxes change the way
people choose to be compensated. I get
compensated in fringe benefits rather
than taxable cash because I have the
choice between 65 cents of spendable
cash or a dollar of fringe benefits.
That choice of fringe benefits that are
worth less than a dollar for every
dollar that they cost to produce implies
economic waste. It shows up as lower
taxable income. A reduction in taxable
income, whether it occurs because I work
less or because I take my compensation
in this other form, creates the same
kind of inefficiency.

Economic analysis shows that if you
want a single measure of the
inefficiencies created by the tax on
labor income, you can just look at
taxable labor income. You don't have to
distinguish whether a higher tax rate
reduces taxable income because I work
fewer hours or I bring less human
capital to the table or I get
compensated in the form of fringe
benefits and nice working conditions.

Therefore, we should look at the data
on how taxable income relates to
marginal tax rates. I looked at the
experience before and after the 1986 tax
cut, because that was a very big, bold
one. The Treasury provided data that
allowed one to track individual
taxpayers over time. So you could look
at an individual a few years before the
1986 Tax Reform Act and at that same
individual a few years later. And that
comparison suggested quite a large
response: Taxable income responded with
an elasticity of about 1, meaning that a
10 percent increase in the after-tax
share that an individual got to keep,
say, going from 60 percent to 66
percent, would increase their taxable
income by 10 percent. So those are big
numbers.

Think about an across-the-board tax
cut. Let's say you cut all tax rates by
10 percent, so that the 25 percent rate
goes to 22 1/2 percent, 15 percent rate
goes to 13 1/2 percent, and so on. That
raises taxable incomes. The revenue cost
of that tax cut is only about two-thirds
of the so-called static result that
you'd get if you didn't take behavior
into account. So both in terms of
thinking about the economic efficiency,
which is very hard to explain to the lay
public—I've been bending my sword
trying—and also in terms of tax revenue,
these are very large effects.

Of course, cutting the 15 percent
rate to 13 1/2 percent has a much
smaller proportional effect on the
net-of-tax share than doing it at higher
rates. So if this were not a change
across the board but a change in the top
rate of the sort that we had in '86,
that would be an even bigger behavioral
impact.

TAX REFORM PANEL

Region: Last year
the president created a tax reform
advisory panel that held public meetings
around the country, with economists and
others testifying before it. In November
the panel came out with a report and a
series of recommendations. As someone
who has studied tax reform for years,
how do you view the panel's
recommendations, and why do you think
they've gained so little traction?

Feldstein: Their
proposals were pretty sensible. Of
course, they didn't have a single set of
recommendations. They emphasized ways of
reducing the taxes on income on savings,
which I think is a good thing to do. We
didn't talk about that, but that's a
very significant thing. They did not opt
for any sort of radical flat tax
reforms, and I think that's probably the
right thing also. Flat taxes are a
wonderful dream, but not a practical
policy.

So why did it not have more traction?
I don't know the answer to that
question. To say that the White House is
concerned with a wide variety of other
things would be an understatement. Why
didn't the Treasury push it more
independently? I suppose that wasn't
their job. Their job was to receive it
and pass it on to the White House, and
the White House chose for a variety of
reasons not to do more.

THE NBER

Region: You've been
the director of the NBER for 28 years,
nearly one-third of its history. What
have been the Bureau's most significant
accomplishments in that period? And what
is your vision for the NBER over the
next quarter century?

Feldstein: A major
accomplishment has been to encourage
empirical research. Empirical research
is a risky strategy. A researcher
starting to do an empirical project has
to know the data and the institutions.
There's a good chance he gets it wrong.
So after he's done all this work and he
presents it, people will say, “Well, you
didn't know about such and such.” Or,
“those data aren't really measuring what
you thought they were measuring.” So
economists were reluctant to [engage in]
serious empirical research.

Economics is different from some of
the natural science departments or
medical schools where there may be a
dozen people who work on very similar
things. In an economics department, it's
unusual to have more than one or two
labor economists or public finance
economists. And even then, they probably
do slightly different things. So there's
nobody to talk to in your own department
about the details of empirical research.
In contrast, of course, you can talk
about economic theory and get useful
feedback from colleagues.

I'm not belittling that, but I'm
saying that the profession had moved
very far in that direction and was doing
much less empirically because of this
natural tendency for people to do things
that were safe and reliable.

In addition, the National Bureau
brings people together. Of course, it's
normally smaller groups than this Summer
Institute. The NBER program meetings
bring together researchers from a dozen
or more universities who are expert in
the area you're working on. A researcher
can present his research and get
feedback. You get to know people better
in this subdiscipline. You can e-mail
them and say, “I'm working on this, and
do you think these data are the best?”

So bringing people together and
encouraging empirical research, I think,
have been two of the really important
things we have done. Also, as an
organization, we launch projects on
important economic issues like exchange
rate adjustment or monetary policy in an
open economy. So the Bureau directs
attention on what we think are important
problems. We did a lot of work on debt
crises, for instance, and we were able
to get people who would say, “Well, I'm
really a trade specialist, I don't know
very much about that, but if there's
really a good group of people working on
it and you'd like me to participate,
yes, I'll participate.” So I think we're
able to focus resources.

Again, that's something you can't do
in a single department. If I as a
professor at Harvard—forgetting the
Bureau—were to call up economists in six
other departments and say, “How would
you like to work on my study?” They
would say, “I don't understand; I'm a
professor at Yale (or Princeton or
Chicago).” It would be like the Harvard
football team calling some guy from Yale
and saying, “How would you like to play
for us?” Nobody thinks that about the
Bureau. It's perfectly natural to
participate in an NBER study. It's a
neutral ground on which people can come
together and do research.

So I think we're able to add value in
terms of bringing resources to bear on
important questions. We did a lot on
Social Security, for example. We
continue to do various things in the tax
area. We have a Washington conference
called “Tax Policy and the Economy.” We
do not advocate policies, so it's quite
different from all of the other [think
tanks]. We work on policy-related
issues, and we can say, “If you do this
policy, that's likely to be the
outcome,” but we stop short of saying,
“Therefore, you ought to adopt a
particular policy.” Individually, I and
other researchers can advocate policies,
but as an organization we don't. But we
can bring attention to it, and we keep
bringing attention to issues like Social
Security and health care costs and tax
policy.

Region: And your
vision of the Bureau 25 years from now?

Feldstein: Somebody
else will be running it, so I'm not sure
how it will develop. The economic
problems will change. The technology may
change. We may do things like more video
conferencing or offering opportunities
for small groups to get together.

Still, there is something about
holding [in-person] meetings that brings
people from all over the world here to
Cambridge. And it's because of the
coffee breaks and the lunches and
everything else as well as just hearing
the papers. It's not just to know what's
in the paper or even to hear the
discussion. It's to talk to others about
your own work and what they're doing and
get a sense of where the profession is
moving.

Paul Samuelson was here today, which
is really quite unusual, and I was
sitting next to him in the meeting room
next door. After everybody had gone
around the room and introduced
themselves, he said, “This must be what
Copenhagen was like in the 1920s when
Niels Bohr was bringing physicists
together from around the world.” I
really thought that was a nice
sentiment.

So I don't know where we will go and
how it will change. You would not have
predicted that it would look like this
25 years ago. In part it's the
technology. I mean, the Internet is an
amazing tool for us in terms of shared
data and collaborative work, and
distribution of the work. We had 21Ú2
million downloads of NBER working papers
last year.

Region: It's a
little daunting how frequently those
long lists of new papers come out. But I
have to guess that leadership, as much
as technology, will guide the Bureau's
future.

Feldstein: Well,
yes. But you know we're a very
decentralized organization, so there are
these separate programs and program
directors. So the meeting next door on
monetary economics was run by David and
Christine Romer from [the University of
California at] Berkeley. The meeting in
[this room] was the international
finance and macro program, which has had
a series of program directors over the
years, and they've all done a very good
job.

And people have been prepared to do
it. The prestige and the chance to
influence their part of the profession
is what I think draws them to do it. I
mean, I can call somebody up and say, “I
think it would be good to do a project
on X. Would you be willing to do it?
We'll take care of all the logistics. So
you can concentrate on the intellectual
part of the task, picking authors and so
on.” I enjoy that aspect of it very much
because I work with the project
directors on both what questions are
going to be asked and who the
researchers are. There are now so many
NBER project meetings that I can't go to
them all. But I go to a lot.

Region: Thank you
very much.

Bruce Webb said...

The Social Security section was
bland. No talk of "crisis", no
suggestion that Social Security as
presently constructed would not be able
to pay its bills. Really just a straight
out assertion that private accounts were
inherently better. Which when boiled
down to policy terms really means "fund
your 401k's and IRAs". Has the Economic
Right just thrown in the towel on Social
Security? Perhaps so.

calmo

Agree with Bruce. And also the bland
(I have other adjectives people) view
that executives, lo and behold, are
managing companies that are n fold
larger, just means their compensation
levels are n fold larger. Niels Bohr,
truly a man with a noodle, was bringing
physicists together because they were
excited --no noodle dysfunction for
them. [Why do people, esp economists,
always resort to comparisons to
physicists when they need noodle
buttressing? Me and Einstein are
suspicious, you?][You and what's his
face the Astrophysicist, got a view on
that?] Ok, the savings rate is going to
bounce back from the current -1.5% as
MEW evaporates according to Marty the
Smarty. [You need to clobber this
reverence for Authority early people.]
And that is because they will be earning
real money (as...physicists owing to the
astounding knowledge they acquired in
the residential market looting) and
investing it in nanotechnology. Yes,
tubes right into Marty's brain so we
won't have to read these tomes.

Bruce Wilder

To me, the subtle thing about economics
is that an economy is a system with feedback
effects. If you push, the economy will push
back. Really thinking in systems terms is a
subtle, but critical thing. Otherwise,
economics just becomes a dead matter of
worldview and whatever platitudes follow
from a particular worldview, instead of
puzzling over an almost living thing.
Feldstein lost his capacity to think about
the economy as a system almost 30 years ago.
He is still a very smart guy, but in a
critically important way, he stopped actual
thinking about economics more than a
generation ago.

On inflation: "I think what the public
wants is price stability. They don't want to
have prices rising. . . . The man on the
street doesn't want to be concerned about
small numbers and/or about “core” inflation
versus “regular” inflation. He wants price
stability; he wants the purchasing power of
the money that he has to stay the same. And
so that's what the Fed's message to him
ought to be."

That's so idiotic that it could well be
the text of a speech by George W. Bush.
Seriously, doesn't it sound like the
President?

Health care: "Of course, everybody wants
to be healthy. We all know that smoking is
bad for your health. We all know that being
overweight is bad for your health. We all
know that exercise is good for your health.
But many people enjoy smoking and they enjoy
eating and they'd rather not exercise. And
they're aware of the consequences. So it's a
trade-off of preferences. And it may well be
that when I go to see the doctor, in
answering questions of how much I want to
spend, I may differ from other people. Not
because I have a higher income, but because
I have different preferences about this."

Right. Thank you, doctor, for suggesting
that we insert a stent to keep open my
cardiac artery, but really, I enjoy a good
heart attack? Don't you?

Executive Compensation: "I guess in the
boards that I've served on I've never felt
that excess compensation was a serious
problem. There was a recent NBER paper
explaining why there's been this n-fold
increase in executive compensation for the
top companies. Well, lo and behold, the top
companies are n-fold larger than they were
20 years ago, and so if you think about the
compensation in proportion to the size of
the business, in part because of mergers, in
part because of just growth and the big ones
growing more than others, that gives you an
explanation of what's going on."

No problem that Marty can see. No problem
at all.

Marty is an idiot, but a useful
idiot, a dependable, reactionary, partisan
whore of an idiot, useful to the worst kinds
of irresponsible, reactionary politicians.

Special note to Bruce Webb: what I note
in what he says about Social Security, is
what he doesn't acknowledge. This is his
standard rhetorical practice. Democrats are
not opposed; they have no leadership. The
1984 Greenspan increase in SS taxes is never
acknowledged. The fiscal deficit is small
and manageable (I guess, because we have a
Republican President).

Reply Wednesday, September 20, 2006 at
08:50 AM calmo said... Nice to be surrounded
by non-whores like these Bruces, yes? Thank
you for your articulate, no nonsense, clear
and concise views Mr Wilder. If I can keep
my prankster mode under control for a moment
and make a contribution following your fine
example: The Region's interviewer/editor
side of this dialogue wherein we learn the
true (current atleast)[possibly decadent]
views of the illustrious [Ok, prankster
control fading here] Herr Doctor Feldstein
(just about pinned by the prankster), do we
get a slanted, possibly even slurred view of
this economist? How would it go with an
interview from Mother Jones? I'm inclined to
think The Region does not do justice to the
man's actual contribution.

Reply Wednesday, September 20, 2006 at
09:48 AM spencer said... When he talk about
the size of corporations the measure he is
using is stock market capitalization not
some measure of output, profits, employment,
etc, etc. We have experienced a massive rise
in the stock market PE because of lower
inflation and interest rates that had
nothing to do with CEO performance. He is
adding crabs and apples to get crapapples.

What I find so interesting is that he can
sound so reasonable and makes broad points
where I say yes, I agree with that. But then
you turn around and look at the details the
Republicans actually propose and the
proposed legislation turns out to be nothing
like the original reasonable proposal.

Finally, note that he talks about the
1985 Reagan tax cuts that were a very
different animal then the original Reagan
tax cuts and what many supply-siders now
propose. Almost accross the board the 1985
tax cuts -- achieved through bipartisan give
and take -- were very good and achieved very
much of their promise.

Reply Wednesday, September 20, 2006 at
10:54 AM DRR said... So what have you done
with your life so far Mr. Wilder?

Marty Feldstein >>>>>>>>>>>>>>>>> Bruce
Wilder

Reply Wednesday, September 20, 2006 at
03:39 PM Bruce Wilder said... MG: There is
no excuse for being that ugly about Martin
Feldstein.

BW: There's Martin Feldstein.

Reply Wednesday, September 20, 2006 at
03:47 PM calmo said... Larson has this
cartoon of God busy with creation --rolling
snakes "This is EASY!!" (And I wish I could
find a link to it). Obviously God has done a
lot of things with his life but snakes here
appear to be a trouble-free delight. Now I'm
not suggesting that Bruce has to come
up/down/over/across to this standard
(Delighted Roller of Snakes) which rings a
certain bell for some of us who can recall
our days with the plastercine, but DRR puts
the plastercine in front of us and who can
resist? Not me. What have you done with your
life, you slab of plastercine? Now that
plastercine has certain properties and if
it's too cold, snakes are NOT easy like God
says. [And it could be that if it's too hot,
the snakes just turn into a gooey mess.] God
just makes it look easy. DDR seems to think
Marty rolled a pretty decent snake (MG too)
and Bruce rolled something less. I'd say The
Region thinks Marty is The Biggest Snake
Ever. And I'd also say that picture is a tad
bloated and hides lots about this pretty
good snake I want to know. Some snakes are
NOT easy as previously reported and refuse
to be rolled just like all the rest. Some
snakes even feel that a list of
accomplishments is way too thin a roll.

I believe that communications and
opinions of others in the USA have gone to
hell. And it is a shame. A real shame.

Bruce Wilder is an excellent thinker and
blog poster. He doesn't have to resort to
that type of name calling to make his point.

Now, that is what I really think. And
it's why I posted my response to Bruce. Who
knows better.

Reply Thursday, September 21, 2006 at
08:28 AM calmo said... Good morning Movie, I
confess to irretrievable biases for Bruces.
And that's why I tried to employ Larson
(bring out the Big Guns I say) [yes, the
real snake rollers] to shift the focus from
Martin to The Region. Or was it just to DDR
and not the wider (vs telescopic) view that
was provoked by DDR's question? I appreciate
that desire to be civil and polite. Mostly.
Unless I can see an opportunity for making a
real fuss... It is only one of my failings,
such is stature of this modestly rolled
snake.

Economist Martin Feldstein's Own Ox Is Gored on the Supply SideBy Davis
Bushnell FacebookTwitterE-mailEconomist Martin Feldstein has no one to blame
but himself. The 41-year-old Harvard professor talked so long, loudly and
persuasively about the benefits of supply-side economics, Washington finally
heard him. Now the Reagan administration is practicing what Feldstein (and
other conservative economists) preaches, reducing federal funding to
organizations like the National Bureau of Economic Research, of which
Feldstein is president. Last year the organization received $2.2 million
(one-third of its budget) in federal grants; that amount figures to be
drastically slashed by the 1981 budget cuts.

Feldstein grimaces at the irony. According to the Wall Street Journal'(to
which he is a regular contributor), Feldstein fired off an "outraged" letter
to Sen. Daniel P. Moynihan, urging restoration of the funding. The Journal's
characterization of the letter, Feldstein says, was a "misinterpretation,"
but he explains that "given the senator's background as a Harvard professor,
I thought he would be able to understand the importance of this type of
research."

A cutback would hurt, Feldstein admits. But he says, "We would not have
to close our doors." The bureau receives aid from some 300 organizations,
including corporations and unions.

Born in the Bronx (his father was an attorney), Feldstein was a
scholarship student at Harvard. He took premed courses while majoring in
economics and graduated near the top of his class in 1961. He went to Oxford
on a Fulbright grant and stayed for six years, earning three degrees, in
addition to marrying a Radcliffe graduate who was also studying there. His
40-year-old wife, Kathleen, an MIT economics Ph.D., co-writes a weekly
syndicated newspaper column on economic policy with him.

Feldstein joined the Harvard faculty in 1967, and at 29 became one of the
university's youngest full professors. The American Economic Association
awarded him the 1977 John Bates Clark Medal, its highest honor for an
economist under 40. And last year the New York Times Magazine called him "by
far the most powerful of the young conservative economists." Feldstein says
of the article that included that tribute, "The parts that are strictly
factual are correct, and I don't have any objection to anything else."

Despite the impact of his ideas, Feldstein has never met President
Reagan. He was reportedly a candidate for the chair of the Council of
Economic Advisers, but he spurned Administration headhunters last winter. "I
find Cambridge a pleasant place to be," he says.

Relentlessly singleminded, Feldstein is unrivaled at economic computer
analysis. He is also a prolific writer (150 papers published) and a frequent
witness at congressional hearings. He grudgingly admits to occasional
cross-country skiing. But he says he has only one real hobby: economics.

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